Finding Overseas Value at Home

Reduced tax rates on dividends and the weak U.S. dollar present weary U.S. investors with opportunities abroad.

And thanks to the time-honored, but not widely known, investment devices called American depositary receipts, or ADRs, U.S. investors don't have to become instant experts on a multitude of languages and currencies. ADRs allow Americans to invest in large- and medium-sized foreign companies using U.S. dollars and domestic stock exchanges.

One big attraction of ADRs is their dividends. A Morgan Stanley study showed that while the typical U.S. dividend is 1.7%, the dividend rate is 3.6% in developed Asia -- excluding Japan -- 3.3% in the U.K., 2.9% in Europe and 2.4% in emerging free markets.

The 2003 tax act dropped rates on dividends from 20% to 15% for the highest income tax brackets and from 10% to 5% for those in the lowest brackets. However, there's no guarantee that the next president -- even President Bush himself -- can retain low taxes on dividends after the current tax breaks expire in 2009.

Even though ADRs are denominated in dollars, they offer investors a currency play that can be volatile. When the dollar is weak, as it is now, it amplifies robust returns on the foreign companies that ADRs invest in.

On the flip side, when the dollar rallies against currencies from other countries, ADRs from those countries will fall at a more precipitous rate than shares held by direct investors in the parent companies.

For now, however, ADRs offer nothing if not a welcome diversion. While U.S. stock markets continue to struggle, as investors wonder what the Federal Reserve will do next and await the outcome of a divisive presidential election, elsewhere in the world in Latin America, Asia and Russia, economies are stirring.

Some individual ADRs help tell the story: For the year to date through Sept. 27, the ADR for Brazilian food company Perdigao S.A. ( PDA) is up 81%. Ditto for the Japanese lender Nissin ( NIS), and Moscow-based Mobile Telesystems OJSC ( MBT) has climbed 66%.

The top-performing ADR this year through Sept. 27 was Irish pharmaceutical company Elan ( ELN), which is partnering with U.S.-based Biogen Idec ( BIIB) on a promising multiple sclerosis drug, Antegren. Its share rose 241%, followed by British oil company BP ( BP) at 233%.

While ADRs derive from foreign companies, many of them are household names here in this country, such as telecommunications giants Nokia ( NOK) of Finland and Ericsson ( ERICY) of Sweden, and U.K.-based drug companies AstraZeneca ( AZN) and GlaxoSmithKline ( GSK).

"A lot of the brands we use everyday are non-U.S. companies," says Anthony Moro, ADR marketing spokesman for The Bank of New York ( BK). The bank, the largest administrator of ADR programs, has a vast, user-friendly DR Web site at

Two other U.S. banks offer ADRs and Web site information: J.P. Morgan Chase ( JPM) ( and Citigroup ( C) (

The first ADR was created in 1927 to allow Americans to buy shares in the still-popular but now privately owned British department store chain Selfridges. With economic globalization, ADRs began to grow in number after the 1980s and have gained increasing popularity in the past five years.

Last year, $630 billion in ADRs were traded, compared with $248 billion nine years earlier in 1994. And it appears that volume in 2004 will exceed last year's.

The Bank of New York cites diversification as one of the main reasons that individual investors, who account for about 20% of sales, and institutional investors alike have been flocking to ADRs. The bulk of ADRs are held by mutual funds and pension funds, some of which are prohibited from purchasing foreign stocks outright.

In recent years, as many as three to six ADRs have been voted among the top 200 stock picks annually by the nation's investment clubs, according to Kevin Lamiman, associate editor of Better Investing, a magazine published by the Madison Heights, Mich.-based National Association of Investors, or NAIC. "ADRs increase diversification," he said. "It's a matter of choices and having alternatives."

Among the companies with ADRs exhibiting at this year's NAIC convention will be Mexican cement company Cemex ( CX), the U.K.'s Scottish Power ( SPI) and the Argentine energy company Petrobras Energia Participacoes ( PZE).

At the American Association of Individual Investors, a Chicago nonprofit investor education group (, president John Markese said that ADRs are a means of diversification. "If you're interested in foreign securities, this is the best way to go, for more sophisticated investors who want to do the work," he said.

He noted that ADRs are not for the casual investor. While they are denominated in dollars, each ADR is calibrated to its parent stock differently.

With some, one depository receipt equals one share of the foreign company stock. With others, the ratio could be 1 to 5, or even 1 to 5,000. The ratio can make following a company's performance confusing.

ADRs are, themselves, not stocks, but certificates created by U.S. banks to represent shares. Of the approximately 1,900 ADRs available in this country, more than 450 are traded on the three major exchanges with the rest available on the pink sheets, or over-the-counter market.

The banks do the back-office work, converting currencies at favorable rates because they are large institutions, and issue the receipts that represent the shares or portions of shares. They also convert the dividends of the foreign companies into dollars.

In today's global economy, financial advisers often recommend that individuals have anywhere from 10% to 20% of their investment assets in stocks outside the U.S. for diversity. But just as with owning individual domestic stocks, buying ADRs requires holding more than a handful for less risk and a lot of study on the part of the investor.

Investors who are looking to broaden their asset allocation internationally but don't have the time or the inclination should consider mutual funds or a generally less costly alternative known as exchange-traded funds, or ETFs. Barclays Global Investors, a division of London-based Barclays ( BCS), offers ETFs known as iShares (, and has some 30 index funds devoted to specific countries or regions of the world.

Before joining, Ann Perry was the personal finance columnist for The San Diego Union-Tribune. She is the author of "The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance" (Broadway Books, 2003). She has a B.A. in English and Communications from Stanford University and a master's degree from the Columbia University School of Journalism. She can be reached at

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